Axiata-telenor talks highlight need for scale in Asia

The proposed merger of Axiata Group Berhad (Axiata) and Telenor’s telecommunications and infrastructure assets in Asia underscores the significance of scale, Fitch Ratings says.

Continuous investment is needed to maintain modest EBITDA growth in the highly competitive Asian telecoms market.

The companies announced on May 6 they are in the early stages of discussions to merge their telco assets in nine countries in Asia. The merged entity (Mergeco) will become one of the largest regional telcos in the ASEAN and South Asia region and potentially one of the five largest tower companies in the world. Many details of the deal remain uncertain. Signing of a binding agreement is expected in 3Q19, subject to approvals from shareholders and regulatory authorities.

The non-cash deal will see Telenor having a 56.5 percent stake in Mergeco with Axiata owning the remaining 43.5 percent. The Mergeco is likely to reap the most synergies in Malaysia, where both parties have an equal presence. The limited geographical overlap in other markets, including Indonesia, Thailand, Sri Lanka, Pakistan, Nepal, Myanmar, Cambodia and Bangladesh, would offer cash flow diversification and regional exposure to 300 million subscribers. The deal excludes Axiata’s Bangladeshi operations held under Robi Axiata, which will continue to be independently managed by Axiata.

The merger of Axiata’s Celcom Berhad and Telenor’s Digi.com in Malaysia is expected to have sufficient scale and operational synergies to compete on data pricing, network capacity and spectrum holdings. The enlarged entity would become the largest domestic mobile operator, with a combined market share of over 50 percent and 35 percent of total revenue share across the domestic fixed and mobile sectors, surpassing fixed-line operator Telekom Malaysia Berhad (A-/negative).

The merged entity will have more pricing power. Stiff competition means that telcos are seldom able to price data to capitalise fully on the rapid growth in data consumption, currently averaging about 11GB per user a month, up from 7GB a year ago.

Changes to the parent-subsidiary relationships of Axiata and its 66 percent-owned Indonesian subsidiary, PT XL Axiata Tbk (XL, Bbb/stable) and Telenor and Total Access Communication Public Company Limited (DTAC, Bbb/stable), the third-largest Thai mobile operator, could prompt reassessments of the level of parental support for these subsidiaries. We use a topdown method in assessing XL with Axiata as a basis, reflecting XL’S strategic and financial importance to its parent. Fitch rates DTAC on a bottom-up approach and the Thai telco receives a one-notch uplift to reflect moderate linkages with Telenor.

The deal is consistent with Axiata’s ambitions for in-market consolidation, as well as a portfolio review for Telenor, which has divested its eastern European businesses and Indian operations and acquired a mobile operator in Finland to focus more on its home Nordic market.

Axiata expects the Mergeco to realise synergies worth MYR15 billion-myr20 billion over five years through consolidation of assets and economies of scale. This, together with plans to list the Mergeco and the global tower operations, provide financial headroom for expansion into mobile and broadband, particularly in Indonesia. XL has been aggressively expanding its mobile network and capacity in areas outside Java, where incumbent PT Telekomunikasi Selular (Telkomsel) has a near monopoly with a share of about 80 percent. It would be challenging for XL to match the incumbent’s mobile-network footprint and convergence capabilities of Telkomsel’s 65 percent-parent PT Telekomunikasi Indonesia Tbk (Bbb/stable). XL, as a mobile-only operator, has limited fixed-mobile convergence capabilities.

DTAC has been facing capex and cash flow pressure. Despite the Thai government’s approval to spread 900MHZ spectrum payments over several instalments, Thai telcos will have to acquire 700MHZ in the upcoming spectrum allocation, likely in 3Q19, as a condition for the payment extension. The local regulator has also indicated that there may be an auction of 5G spectrum this year. Fitch expects DTAC to step up marketing promotions to regain market share, potentially delaying EBITDA recovery to 2020.